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Market Exuberance to Continue?

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The busy economic and earnings calendar this week will give stocks a clear directional nudge after they reached milestone levels late last week. Rampant optimism, stemming from positive economic data and a decent Q4 earnings season, has pushed the S&P 500 to above 1500 and the Dow Jones Industrial Average within a few hundred points of its all-time high.

This morning’s strong December Durable Goods Orders report will likely help sustain the momentum of the last few days, though the earnings report from Dow component Caterpillar (CAT - Free Report) appears to be on the weak side. But irrespective of today’s market action, there is no shortage of catalysts this week, including the January nonfarm payroll report on Friday and Wednesday’s Q4 GDP report to potentially the market to new heights.

The December Durable Goods report was particularly strong, with the headline gain of +4.6% coming in better than the expected +1.6% gain, while the prior month’s +0.7% change was left unrevised. Excluding transportation orders, which tend to be ‘lumpy’ from month to month, order increased +1.3% compared expectations of +0.4% gain and the +1.2% increase in November (revised down from +1.6%).

Non-defense capital goods orders excluding transportation, which is considered a proxy for capital spending in the economy, also increased at a better-than-expected +0.2% pace. Corporate spending had been softening lately after staying fairly strong earlier in the economic recovery, but today’s durable goods report shows that it may not be that bad.

Other key economic data this week include the first read on Q4 GDP on Wednesday, which is expected to show a sub-1% growth rate due largely to temporary factors related to government spending and Sandy related disruptions. The January non-farm payroll report coming out on Friday is expected to show job gains of about 160K, though the sharp drop in weekly initial Jobless Claims data increases the odds of a positive surprise.

We also have the FOMC meeting on Wednesday, though the only point of interest in the post-meeting statement will relate to how the central bank characterizes the current state of the economy.  

The earnings calendar is extremely crowded this week, with 105 S&P 500 companies reporting Q4 results, pushing us beyond the halfway mark by the end of the week. This morning’s major earnings reports are a bit on the weak side, with Caterpillar and Biogen Idec (BIIB - Free Report) missing expectations, while Roper Industries (ROP - Free Report) beating on earnings but missing on revenues. Yahoo is the major earnings report after the close today.

Total earnings for the 150 S&P 500 companies that have already reported Q4 results as of this morning are up +0.3% from the same period last year, with 63.3% of the companies beating earnings expectations with a median surprise of +2.4%.

Revenues are up +4.9%, with a much stronger 62% of companies beating top-line expectations with a median surprise of +0.6%. This is a better performance than what this same group of companies reported in the preceding quarter, but broadly in-line with the past year.

The composite Q4 earnings and revenue growth rates, where we combine the results of the 150 companies that have come out with those of the 350 still to come, is showing positive +0.3% and negative -0.6%, respectively. This means that earnings growth rate has effectively flat-lined.

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